Why Warren Buffett Most Likely Just Made A Big Mistake!

Each quarter, the "big boys" in the market have to report their positions because they're so large. Once those reports are made public, it shows what stocks they're adding to or reducing their exposure in and what stocks they've recently bought or completely sold out of.

Well, the latest report just came out and it shows that Warren Buffett just added to his position in Apple (AAPL). Now, keep in mind that when it says "he" added to the position, it could very well be his two new money managers at Berkshire Hathaway, Todd Combs and Ted Weschler.

While they've done well since he's had them on board, they've also mainly been a part of an "up" stock market as well. Additionally, I'm not convinced that they invest the same way that Buffett does. But either way, I think Buffett or whoever he let add to his Apple shares made a big mistake.

Apple's stock tends to be priced cheaply when its price-to-earnings ratio (P/E) is around 10 and it becomes very risky and expensive when its P/E has historically gotten up to around the 18 level. Well, today, it's trailing P/E sits at 19! That's on the expensive side! What happened to his buying-cheap-and-selling-high philosophy? He or his managers have gotten into the "buy expensive and hope there's a greater fool who's willing to pay more" scenario.

And when I look at the technical picture on the chart, it has a similar view. Let's take a look.

Above, you'll see the chart of Apple over the last 20 years. No doubt, it's had an amazing uptrend. And when it's P/E was historically cheap and it traded near its red, 200-week moving average line, we bought it. At those times it was hated and shunned and doubt always filled the air about Apple's future. That's when we jumped on Apple because it was trading at a value. Yet, each time it would pull very far away from that moving average and its P/E would climb a lot, we'd sell and lock-in a great profit because the down-side risks were suddenly greater than its upside reward.

Notice the black line. Notice that Apple has stretched even further above that line, its 200-week moving average and its green uptrend line than at any time in the past 20 years. And that's when he thinks its a great time to buy more shares?!?

Notice that each and every time the price got this far stretched above its red, 200-week moving average, it snapped back towards it. And it may not be too far from beginning that decline since the RSI has been losing steam as the stock went higher. That means its upward momentum is slowing down.

Now...if Apple just fell from where it is today down to the red moving average line, it would lose at least one third of its value. Yet from where the stock trades right now, it's not likely in the near to medium-term to jolt 1/3rd to 2/3rds higher in price. Therefore the downside risk greatly outweigh the upside reward. Buffett is not known for being good at picking his entry prices and he's certainly no chartist either. He has been great at averaging down on his positions over time and giving his stocks A LOT of time to go up in his favor. That latter part is where he shines.

HOWEVER, if he's accumulating stock at multi-decade and even all-time highs, it could take quite a while for those shares to get back to break-even. So to me, this was a reckless move on his (or his manager's) behalf. So, in my opinion, don't look at Buffett adding to his shares as your signal to buy. I believe that would be a great mistake.

yeah that did make the difference. interesting how without it checked, the stock is beyond the upper end of the channel, but with it checked, it's in the middle of the channel with lots of room to go higher. a bullish aapl analyst i was watching recently, i think was using the checked version of the chart to make the case for another leg higher, saying that the upper end of the channel would be around $200. that log scale makes a huge difference either way...thanks for sharing that with me

yeah i can definitely see that. thanks again for sharing that, that's an eye opener for sure! i noticed that the mac-d on this chart looks to be making lower highs and lower lows. looks to me like it wants to head lower. are you seeing that too?